Asset Protection – Podcast #54

Podcast #54 Show Notes: Asset Protection

This episode is about asset protection. We discuss what you can do to better protect your assets like houses, taxable accounts, real estate, etc. Plus of course answer listener questions about backdoor Roth IRAs, PSLF, marijuana, and cash flow banking. You can listen to the podcast here or it is available via the traditional podcast outlets, ITunes, Overcast, Acast, Stitcher, Google Play. Or watch the video here or on YouTube. And now you can even ask Alexa to play it for you. Enjoy!

Podcast # 54 Sponsor

[00:00:19] This episode is sponsored by Set for Life Insurance. Set for Life Insurance was founded by President, Jamie K. Fleischner, CLU, ChFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life, disability and long term care insurance. They work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for Life is first and foremost a client-centric company. They listen carefully to the needs of clients and shop around to find the best products available at the best rate. Because of the volume and exceptional reputation of Set for Life Insurance, as well as the relationships they have developed over the years, Set for Life clients have access to special services not available elsewhere in the industry. This includes special discounts, gender neutral policies (saving women significantly), priority underwriting handling and on some occasions exceptions in the underwriting process. For more information, visit Set For Life Insurance.

Quote of the Day

[00:01:19] Smart women figure out what, exactly, makes them happiest. They spend generously on those things but cut out the rest. -Laura Vanderkam

Main Topic

[00:04:41] When I first started blogging back in 2011 I thought I was going to be doing lots of posts about asset protection. I thought it was really important, big part of personal finance for physicians. Then I got into it and realized that there is not a lot for me to write about it and that is because of two reasons. The first one is the best asset protection is typically quite simple and inexpensive. And the second is that complex asset protection is something that is almost never used. Before you get to asset protection though you really have to look at risk management.

[00:05:59] Ways to manage risk.

[00:10:14] Discuss state specific laws as far as what is protected and what is not protected.

Q&A from Readers and Listeners

[00:14:35] This is a doctor who is looking to do a backdoor Roth IRA for the first time and he stumbled on my backdoor Roth IRA tutorial. He wanted to know is that still accurate, especially with regard to the step transaction doctrine.

[00:16:49] “If I kept money in the traditional IRA for a few months and now have a balance of 5503.23 do I move the entire amount to the Roth IRA and pay taxes on the 3.23 or do I move over 5500 and keep 3.23 in the traditional IRA?”

[00:18:06] “I’m a pediatric resident about to wrap up my last year. I’ve been able to moonlight a lot lately and successfully paid off my student loans. I also fully invested into my 2017-2018 Roth IRA. Since I cannot open an HSA nor have a 403b match, what should I do with any money I saved during fellowship?”

[00:20:36] “If public service loan forgiveness goes away via the policy changes or I opt out after residency will I be left with a bigger problem than if I would have just started on a regular repayment plan in July of my intern year?”

[00:22:45] “I wanted to pick your brain about disability insurance and saving for retirement. My insurance guy keeps telling me that disability insurance is not enough because if I become disabled then I will not be able to save enough for retirement while also paying the day to day medical bills.”

[00:24:26] “My parents got me life insurance as a child and they still pay on it. How do I sell it?”

[00:27:15] “I’m wondering what you think of the emerging marijuana market. Medicinal and recreational.”

[00:29:11] “My wife and I were both residents. We were recently told by a financial adviser about this new way of life insurance called cash flow banking. I’ve not read anything about it on your blog or have not heard you mention it in the podcast. They sell it as a savings account that will be tax free in the future when you take the money out. My question is do you know anything about this financial tool?”

Ending

[00:29:58] Be sure to follow us Twitter or Facebook. Come by the Forum and sign up if you have complicated questions and you will be surprised how much help you can get there.

Full Transcription

[00:00:00] This is the white coat investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here’s your host Dr. Jim Dahle.

[00:00:19] Welcome to podcast number 54. Asset protection. This episode is sponsored by set for life insurance. Set for life was founded by President Jamie K. Fleischner CLU, CHFC, LUTCF in 1993 which she started while attending Washington University in St. Louis. They specialize in individual term life disability and long term care insurance. Their work on the client’s behalf to shop around to find the most suitable products at the most cost effective rate. Set for life is first and foremost a client centric company. They listen carefully to the needs of clients to shop around to find the best products available at the best rate. For more information visit W.W.W. Set for life insurance dot com.

[00:01:01] Welcome back to the podcast. It’s been a couple of weeks since we recorded anything. So here we are sitting in the basement studio. Our new tax deduction if you will since we got to take the home office deduction this year and record this. It’s nice to be able to work in my old ratty sweatshirt and it’s nice to be back with you today.

[00:01:19] Our quote of the day today comes from Laura Vanderkam who said smart women figure out what exactly makes them happiest. They spend generously on those things but cut out the rest. Obviously that applies to smart men as well.

[00:01:32] It’s been a rough day to day. It’s the 17th of April and we’re recording this and not only is it tax day but we also had the site go down this morning. It can be really frustrating running a business sometimes when you’re not in charge of every aspect of it and you’ve had to outsource some things and those things go bad but I guess that’s part of the challenge is learning to overcome those things. And keep everything running keeping all the balls in the air is actually one of the biggest challenges around here sometimes.

[00:01:59] Taxes were a lot more complicated for me this year. This is the first year that we’ve filed as an S Corporation. I’ve done partnership returns the last couple of years and before that you know it seems like maybe doing a Schedule C is a sole proprietorship was difficult but looking back I can’t imagine that I ever thought that was difficult compared to what we’re doing now. But it’s actually introduced a lot of additional complexity of being an S corporation. I mailed seven different envelopes yesterday when I went to the post office to get all my taxes filed between corporate returns and different state returns. Thanks to a physician on fire I got to learn all about a Minnesota tax return this year. But it’s nice to have that all done and behind me.

[00:02:44] Well that’s not actually the case. I was just making a list this morning of All the different tax deadlines I have in the next year and instead of once a year on April 15th it turns out now I get to do taxes or something to do with taxes either a payment or a return on January 15th January 30 first March 15th March 31st April 15th April 30th June 15th June 30th JULY 15th July 31st September 15th October 15th October 30 1st and December 31st. It’s pretty unbelievable how much time you can spend complying with the tax code sometimes. I was appalled to actually look on the corporate tax return and see how much time they expected it was going to be taking filling out that return. You know they estimate this for all the tax forms out there. You can turn to the last page on them and we’ll tell you how much time it thinks it’s going to take you to fill out that return.

[00:03:40] For the corporate tax return. It told me 240 hours. Unbelievable. Right. Ten full 24 hour days. Basically an entire month of work weeks in order to take care of that return which is obviously much more than I actually spent on the return. And maybe that will come back to bite me in an audit. We’ll find out. But at any rate I got to learn lots about the tax code this year that I’m sure will be helpful when I eventually get around to doing a book on taxes. That is if I can ever stop doing taxes long enough to do a book on taxes.

[00:04:15] I’m going to go through a bunch of questions we’ve been getting by e-mail. Please continue to send us your questions by e-mail, by Twitter, by Facebook, however you like to get in touch with us and we’ll share them on the podcast. People are always asked me please let me stay anonymous. And I think I keep just about everybody anonymous on these questions unless it’s something that they’ve they’ve asked me not to specifically or if they put it out there into the public sphere already on Twitter or Facebook.

[00:04:41] But the first question I wanted to deal with comes from a doc who writes in and says Can you do a podcast on asset protection for physicians especially their houses, Taxable account, real estate etc. and what physicians can do to better protect their assets. Well asset protection is kind of a broad field. And when I first started blogging back in 2011 I thought I was going to be doing lots of posts about asset protection. I thought it was really important big part of personal finance for physicians. I mean I thought it was going to be every 6 or seventh post. Then I got into it and realized that there’s not a lot for me to write about it and that’s because of two reasons. The first one is the best asset protection is typically quite simple and inexpensive. And the second is that complex asset protection is something that is almost never used. Now I’ll get into that a little bit more. But before you get to asset protection you really have to look at risk management. The ideal of course is never to have that risk come up in the first place and so risk management for a lot of people involves just not doing anything that could get you sued in the case of a doctor that means not practicing medicine which obviously isn’t an option for most of us. But there are other ways in which you can manage risk.

[00:05:59] You can avoid having a pool in your backyard or a trampoline or a rottweiler back there. You can avoid getting a boat or a snowmobile or a four wheeler. All these things introduce risk to your life things like fixing the you know the light bulbs that are burned out at your rental property for instance can help reduce your risk. But once you’ve already been sued then you have to rely on the asset protection that you’ve put in place and obviously you have to put that in place before you ever get sued or it doesn’t do any good. But asset protection comes in various layers and the first layer the first line of defense you have is generally insurance. Now for most doctors when they’re thinking about asset protection they’re thinking about the risk of being sued for malpractice and the insurance that protects against that is malpractice insurance. And it’s obviously very expensive more expensive for neurosurgeons and OBGYNs than it is for family practitioners and dentists but expensive for all of us really. But the truth of the matter is the likelihood of you being sued above and beyond that insurance is incredibly low. That insurance covers not only your defense but it also covers any payouts whether there are settlements or whether there’s something you have to pay out after you go to court and lose in court. That’s what the insurance covers. But the truth of the matter is most malpractice suits never get anywhere near a courtroom. They’re either dismissed or if the doctor realizes this isn’t a great case. There are subtle. And you never settle for more than policy limits which is really the concern doctors have when it comes to asset protection.

[00:07:35] They’re terrified that they’re going to be sued for more than policy limits and actually lose their personal assets. That sort of scenario is incredibly rare perhaps one out of ten thousand is what I calculated out for a typical emergency position. One in 10000 per year is your chance of being sued successfully above your policy limits. And the reason why is many fold. One most time you win. Number two and you don’t usually settle. And number three when you do go to court and you lose it’s usually for less than policy limits even in those events where it’s abolishing limits it’s usually reduced to policy limits on appeal. It’s so rare that doctors actually lose personal assets. They’ve actually examined some of these cases and seen these ones where doctors do lose personal assets. And surprisingly the average amount is a low six figure amount that they lose. It’s not that they lose everything they’ve worked so hard to get. And so I thought that was pretty reassuring when you realize that this risk that we’re all worried about really isn’t as high as you might think it is.

[00:08:41] Now of course there are other risks besides just malpractice. And that’s where your other liability insurance comes in. This is usually thought of as an umbrella policy. But the truth is you have some liability insurance in your homeowner’s or renter’s insurance as well as your auto insurance in fact the auto insurance is pretty important. About 80 percent of the suits that occur are against personal liability conference policies are related to the use of an automobile. That’s really your biggest risk is driving around or especially in your teenage kid driving around.

[00:09:14] And so you may want to raise those limits as well even if you don’t decide to stack an umbrella policy on top of it. But what I generally recommend is that you have an umbrella or personal liability limits that are similar to what you have for your malpractice policy needs to be a seven figure amount at least a million bucks. That’s enough that someone can be paid and feel like they got paid well and that will cover a robust defense for you. And so that’s what I recommend you do is raise your home and your auto liability insurance up to perhaps three hundred thousand dollars and stack an umbrella on top of that. Now people are always asking Well how much umbrella insurance do I need. Well the truth of the matter is you need enough, whatever you’re sued for, That’s how much you need. And it’s hard to predict that in advance. But it’s almost surely a seven figure amount I’d say a million at a minimum and perhaps as high as five million is about how much you need. The good news is it’s way cheaper than malpractice insurance for a few hundred dollars you can get one or two or even five million dollars in coverage a year. And so I recommend you do that.

[00:10:14] Now once you get beyond the insurance you’re really getting into state specific law as far as what is protected and what is not protected in most states your retirement accounts are protected. Now what do I mean by protected.

[00:10:27] I mean if you get sued about policy limits you’re that one in ten thousand doc that gets sued above policy limits and they actually come after your personal assets and you have to declare bankruptcy. What do you get to keep. Well in most states you get to keep your retirement accounts in many states. You get to keep any life insurance cash value you might have. And you oftentimes get to keep some or all of your home equity in some states like Texas and Florida. You get to keep you know pretty much all of your home equity. In other states very little is protected I think in Utah it’s forty or fifty thousand dollars that’s protected for a typical married couple. So if I was sued about policy limits and had to declare bankruptcy I’d basically lose almost all of our home equity but that’s not the case in many states.

[00:11:14] You know these laws are actually pretty interesting when you look at these homestead laws a lot of times they include some chickens and some cattle and some rifles or a shotgun. You’d be surprised what gets protected in bankruptcy according to these laws oftentimes these laws have been rewritten for 100 years or more and they’re often not indexed the amounts are often not indexed to inflation. So that can be pretty interesting when you dive into those laws. Some other things that people do to protect their assets is that in some states you can title your house and even other property as tenants buy the entirety. And what that means is that both you and your spouse own the entire property or the entire account. So if only one of you get sued they can’t lose any of the assets in that account because they’re entirely owned by the other person.

[00:12:01] And so if that’s available in your state you should use it to title as much as you can certainly your house and probably your taxable investment account as well. Now if you’re into real estate investing you’ve got a bunch of income properties you probably want to put those into limited liability companies. Now LLC law is also state specific to see what remedies are available to people who want to sue your LLC. But in a lot of states they’re limited just to a charging order which means that when the LLC distributes income that they get their piece of it you know really your piece of it that now goes to them because they successfully sued you. But the fun thing about an LLC is you don’t actually have to distribute the income. But despite not distributing the income those who would have gotten the income are responsible for the taxes due on it. And so you can basically send this person that sued you a tax bill without actually sending them any income as long as you don’t take any income out of the LLC. And so having that remedy available to you oftentimes will lead them to want to settle with you rather than take you to court in the event that something bad happens. And so you want to use LLC and corporations in that sort of a manner to try to give yourself a little bit of additional protection if you own businesses such as rental properties.

[00:13:18] Above and beyond that there’s not a lot that you can do as far as protecting your taxable account for instance like this questioner asked. You know you can start using some creative things like family limited partnerships and overseas trusts but the more complex you get the less likely it is to work. And the reason why is you have to be able to stand in front of a judge and give a good reason why you put this structure in place. And the good reason can’t be asset protection. It has to either be business purposes or it has to be for estate planning purposes. And so if you don’t have some other good reason to be using this structure is probably not going to last in court and they’re probably going to pull the money through on it. Don’t assume that there is some way that you can you know absolutely protect these assets a lot of docs think in terms of my protector I’m not protected. And it’s really far more shades of grey than it is black and white like that. So asset protection is worth learn a little bit about. It’s certainly worth knowing your state specific laws. It’s definitely worth getting high insurance amounts put in place as well as doing the other things that are cheap and easy like titling your properties and putting them inside LLCs. But for the most part you know this is something that Docs worry about far more than they really should be.

[00:14:35] OK let’s go on to another question here. This one is about the step transaction doctrine. This is a doc who is looking to do a backdoor Roth IRA for the first time. And he stumbled on my backdoor Roth IRA tutorial which apparently I wrote in January of 2014. He wanted to know is that still accurate especially with regard to the step transaction doctrine.

[00:14:55] Is your perspective on not waiting to make the conversion still the same. Have there been any IRS specific rule changes or is the method the exact same. Are there any income limits that prevent anyone from doing the backed or Roth conversion. This seems too easy. I’ve opened my traditional IRA account with Vanguard and deposited the fifty five hundred into it via the money market fund as you described and prepared to then converted into my existing Roth IRA but wanted to double check that nothing has changed in four years.

[00:15:18] Yeah nothing’s changed in four years. That’s the bottom line. In fact in early 2018 Congress has basically come out and blessed the Backdoor Roth IRA. And so I think it’s very clear now that this is legal that you don’t have to wait a day in order to do you know you don’t have to wait a year or a month or weeks between your contribution and your conversion step. I think it’s very clear nobody is being prosecuted for doing this and it is you know basically the law of the land right now until Congress changes the rules.

[00:15:50] For those not familiar with the step transaction doctrine is basically an IRS doctrine that says if the sum of two steps is not legal you can’t do it even if each of the individual steps is legal and people have been worried for years that someone would apply this step transaction doctrine to the backdoor Roth IRA even though nobody has ever done it. And so bottom line you can still do a back to a Roth IRA. We do it every year. I broadcast it to the world.

[00:16:16] The IRS is very much aware that this is what I’m doing as I send them documentation every year now for for what nine years. They don’t have a problem with it. And if you’d like to have some tax free income in retirement I highly recommend you do a back to Roth IRA each year.

[00:16:31] There is a question Are there any income limits that prevent anyone from doing the backdoor Roth conversion. No and in fact if you’re worried that you’re getting close to that direct Roth IRA contribution limit just do it by the backdoor. Even people below that limit can do it by the backdoor. And so you might as well if you’re worried about that.

[00:16:49] All right. Next question. This is another question similar to the other one which asks if I kept money in the traditional IRA for a few months and now have a balance of 55 0 3.23 do I move the entire amount to the Roth IRA and pay taxes on the 3.23 or do I move over 50 hundred and keep 3.23 in the traditional IRA. I actually wrote a whole post about this because I get this question all the time. I called the Post Penny’s and the backdoor Roth IRA. And this happens because the money earns interest while sitting in the traditional IRA before you convert it. So the longer you leave it there. The larger this amount can be. But the bottom line is when you go to convert it just convert the whole thing. You might end up having to pay taxes on a dollar too but that’s not going to be a big deal.

[00:17:36] More likely will be a few cents and since you round those down on your tax forms you’ll actually get that growth for free. You got you know like minds got 42 cents in it. I think that 42 cents isn’t going to be taxed. Isn’t that wonderful. But yeah bottom line people worry about these pennies too much. If you lived in the traditional IRA and convert it next year that’s fine if you converted to a Roth IRA this year. That’s fine too. It’s not a big deal. Just make sure you fill out Form 86 06 properly according to whatever you did.

[00:18:06] Next question comes from someone who calls himself or herself a young and restless resident. I’m a pediatric resident about to wrap up my last year and we’ll start a neonatology fellowship in July. I’ve been able to moonlight a lot lately and successfully paid off my student loans. That’s really great, As a resident. I also fully invested into my 2017 2018 Roth IRA as I’m lucky in the sense that I have no deductible health insurance and my current university and also from my fellowship that means I can’t open an HSA account my current and next job offer for O3b with no match by the employer. Since I cannot open an HSA nor do a match for one day what should I do with any money I saved during fellowship. Should I save it aside for a future house down payment, should I contribute to the 4 O3b, even though it’s not matched, any other good options? I am single and without kids there’s no opportunity for spouse Roth IRAs or 529 etc. There’s nothing really I need right now and love to put the money to the best use possible.

[00:19:01] I actually get questions like these a lot people are wonder what should I do with my money. Well what do you want to do with your money. You know it really comes down to what your goals are if your goal is to save for your kids retire your kids college to put it in a 529. If your goal is to save up a house down payment to pay for a house where you ought to start saving for your house down payment. If you can’t think of anything else you know the usual default option is to save for retirement and this sort of a scenario that’s probably the right thing to do. As a resident or even as a fellow if you have a Roth 403 b option that’s probably the way to go. And that way you can contribute and get even more into a Roth account while you’re still in a low tax bracket than just putting it into a Roth IRA. If somehow you’ve already maxed out all your available retirement accounts you can always invest more money into taxable. But the truth is for most residents and most young attendings you have so many competing needs for money that you can’t fund them all. So you’re going to have to make some decisions about whether you save for a down payment or whether you max out retirement accounts or whether you pay down student loans. And there’s not always a right answer to these questions. So just do the best you can. Make sure you’re putting a significant percentage of your money toward building wealth.

[00:20:15] And don’t sweat the small stuff so much whether it’s going toward paying down your student loans or whether it’s gone toward maxed out retirement accounts those are both good things to do. So I wouldn’t feel bad that you might make a mistake there. The mistake that most people make is they don’t put enough money toward building wealth. Period. Not so much where that money actually goes. So don’t sweat it too much.

[00:20:36] Another question this one about public service loan forgiveness. If public service loan forgiveness goes away via the policy changes or I opt out after residency will I be left with a bigger problem than if I would have just started on a regular repayment plan in July of My intern year? Because if I start a regular repayment plan assuming I can make the monthly payments after residency I’m seven years away from completion at which point I can refinance and be done in under five. Like you recommend.

[00:21:01] Well I mean this is just a classic student loan management question right. First decide whether you’re going for public service loan forgiveness if you’re going for Public Service Loan Forgiveness stay and the government programs. Usually that means the revised Pay As You Earn program because the government will subsidize your interest rate if you’re in that program. There are a few exceptions particularly if your spouse is a higher earner in which you might be under the regular Pay As You Earn program and be filing your taxes married filing separately if you’re in that category you probably need to get some professional advice as far as doing the right thing. But this question is more about if public service loan forgiveness goes away am I hosed?

[00:21:42] Well not really because typically you’re going to be in the revised Pay As You Earn program anyway and that’s usually going to offer you a better effective interest rate than what you can refinance to as a resident. And so you’re really not hosed in that manner. Now once you’re an attending you actually have enough money to be paying off these loans. What you want to be doing and if you’re going for a Public Service Loan Forgiveness is saving money in side account that would pay off those loans. That way if something happens to a public service loan forgiveness like the Obama proposal in 2013 that would limit it to just fifty seven thousand dollars of forgiveness. Then you’ll have that side fund and you can just take that side fund and use it to pay off the loans just like somebody who had refinanced their loans and was just pounding them out to be rid of him in two or three years after residency would have been doing. And you can do the same thing. So that’s the way to usually deal with public service loan forgiveness is to keep that side fund going that you can use in case of legislative risk shows up all right.

[00:22:45] Here’s one about disability insurance. Wanted to pick your brain about disability insurance and saving for retirement. I’ve duly dutifully signed up for the most important insurance is available to me while avoiding the trap of whole life. My insurance guy keeps telling me that disability insurance is not enough because if I become disabled then I will not be able to save enough for retirement while also paying the medical in day to day bills.

[00:23:06] How do you recommend saving for retirement and disability or insuring against that without waiver premium whole life. Well here’s the deal when you decide how much disability insurance you need. You need to include enough to pay for not only your lifestyle but also perhaps a little more expensive lifestyle if you’re going to have a bunch of new medical bills and also enough to save for retirement because most disability insurance only pays until you’re 65 or 67 after that If you haven’t saved for retirement you’re going to be reliant wholly on Social Security which isn’t what most doctors envision as a comfortable retirement. And so you need to take out a little bit more than just enough to pay for your lifestyle that disability insurance benefit needs to be large enough to pay for all your expenses plus retirement savings. And that’s really the way I would do rather than buy in some additional insurance product. Now some disability insurance policies come with an additional benefit to save for retirement is usually a rider that you pay extra for. But I think in general this is a bad idea. I’d rather see you use your money to buy a bigger benefit in the first place and certainly I don’t see a need to be messing around with things like waiver premium whole life insurance in order to cover this need. the insurance you need is disability insurance just buy enough of it to meet your needs.

[00:24:26] Here’s another whole life question. My parents got me life insurance as a child and they still pay on it. To this day how do I sell it. I’m 35 years old. No kids and I smoke. Well none of that has anything to do with whether you can sell it or not. There are a few things you can do with a life insurance policy that you don’t want. The easiest is just to surrender it and walk away now. It’s a term policy. You just walk away. You don’t get anything that doesn’t cost you anything. If it’s a cash value policy there’s usually some cash value in there that you can walk away with and the insurance company can tell you what the surrender value is. If you call them up and say Hey I’d like to surrender this policy. How much money do I get. They’ll tell you how much money it is and that’s one option. You can just surrender the policy and walk away.

[00:25:09] If you’re elderly particularly in bad health a lot of times you can sell the policy for more than that cash value their investors who go around buying these things they’re called viatical settlements and they’ll give you more money than the insurance company will because they think it’s a good bet to keep that policy in force. So basically then they pay the premiums and when you die they get the payout. So that’s another option but that’s probably not an option for this doc in this case. That’s 35 years old. Chances are if your parents bought you a whole life insurance policy on you when you were a kid it’s not a very good policy. You know if you’re buying your insurance from the same people that are selling you baby food you’re probably making a mistake.

[00:25:51] But most of these policies are pretty crummy policies but this is something you want to be a little bit careful with right. Your parents were trying to help her out. They were trying to do the good thing and they’ve been paying on this thing now in this case for 35 years. And so I think the most important thing is to say hey mom and dad thanks you know you’ve given me a nice gift. You know I think I probably have a better use for now than leaving it in place as a whole life insurance policy. But it’s totally reasonable to cash that out and put it toward paying off your student loans or maxing out retirement accounts et cetera.

[00:26:25] Now if you thought this might be a good policy worth holding onto that the returns going forward would be acceptable to you. Then you’d have to do the typical thing of running your numbers and seeing what the return going forward on the policy is going to be. With most whole life policies, The first few years are the terrible return years and then they start getting better but those years are water under the bridge. If you’ve already had this thing for 10 or 20 or 30 years it might be perfectly reasonable to keep a policy after a decade that you never should’ve bought in the first place. And so if you’re in one of those situations run the numbers. But chances are this is something your parents bought for you 35 years ago. It’s a tiny little policy. It’s got terrible returns and you really should be using the money for something else. Just thank your parents and move on and use whatever you can cash it out for usually a few thousand dollars to pay off your student loans or something.

[00:27:15] Okay here’s another question this one is a little bit off the wall. I’m wondering what you think of the emerging marijuana market. Medicinal and recreational. That’s it. That was the whole email. I wasn’t really sure what this person was asking. I guess I could start with my opinion about medicinal marijuana. I think it’s all a bunch of bunk right. I’m all for more study there. I think it’s great to study things that might help people. I’m not even really totally against recreational marijuana but colon medical is really misleading. I mean this isn’t medical. I think if it’s medical you got to go well what are the medication interactions. What is the dosage what are the side effects and exactly. Nobody really knows this stuff and so call it a medicinal marijuana is really just kind of the backdoor route into making it legal in a state. You know I think taken some of the compounds out and using them for seizures and that sort of thing is great but let’s study it and let’s figure out what the dosages are and this figure out what the safety concerns are. Like any other medication rather than just saying you know marijuana is awesome. But I’m not sure that that’s what this doc was asking. I think he was probably asking more about investing in marijuana stocks and when it comes to buying individual stocks or sectors I pretty much just buy all the publicly traded stocks by using index funds.

[00:28:29] I don’t buy individual stocks I don’t buy narrowly focused funds. Maybe the doc was asking about opening a small business selling marijuana. I live in Utah so that’s not really an option. It’s pretty much illegal here. It’s not going to be legal anytime soon. I think I’d probably have an ethical issue selling it myself but if that’s something you want to open and have an individual business you can go ahead and do that. You know it’s like any small business though there’s a lot of risk to it and you need to evaluate every deal individually because they’re each an individual deal. Some are less risky than others and you got to know enough to analyze that know enough about business to run it well.

[00:29:11] Okay another question here comes from a couple of residents. My wife and I were both residents. She is in her final year. I’m an intern. We were recently told by a financial adviser about this new way of life insurance called cash flow banking. I’ve not read anything about it on your blog or have not heard you mention it in the podcast. They sell it as a way of savings account that will be tax free in the future when you take the money out. My question is do you know anything about this financial tool. Any experiences or recommendations.

[00:29:38] Yeah I’ve got a lot of experiences with it. This is whole life insurance. So life insurance by another name. Why do they call it cash flow banking. Because you probably already know to avoid a whole life insurance but you don’t know to avoid cashflow banking. But it’s the same stuff.

[00:29:51] Sometimes this goes under the name of infinite banking or bank on yourself. I’ve got a whole post on the blog called A Twist on whole life insurance but basically the idea here is is you buy a cash value usually a whole life insurance policy you overfunded in the beginning and then after four or five years it breaks even by then if you’ve designed it well you can start borrowing against it now like borrowing against your house or borrowing against your portfolio. You can borrow tax free and so technically yes that is tax free. You can get the use of the money but if you actually want to close it out you know like anything any gains you have you’re going to have to pay taxes on the gains and they’re not even long term rates, They are the ordinary income tax rates they have to pay on that. So I don’t think it’s the craziest thing to do if you really understand it and you buy a policy that’s designed specifically to do that but I don’t do it in my life and I generally recommend against whole life insurance. I think most of the people that are being this is being pushed on are just meeting with somebody that they’ve mistaken for a financial adviser. There’s really a commissioned salesman and just trying to get a commission on whole life insurance from him.

[00:31:00] I’d like to thank this episode sponsor, Set for Life insurance. Because the volume and exceptional reputation of set for life insurance, as well as the relationships they’ve developed over the years, set for life clients have access to special services not available elsewhere in the industry. This includes special discounts gender, neutral policies which save women significantly, priority underwriting, handling and on some occasions exceptions in the underwriting process. For more information visit WWW. set for life insurance dotcom.

[00:31:28] Head up shoulders back. You’ve got this and we can help. Come by and make sure you connect with us on Twitter and Facebook. Come by the Forum and sign up if you have complicated questions and you’d be surprised how much help you can get there. See you next time.

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11 comments

As far as insurance goes what are your thoughts on long term care insurance? There have been people on both sides of the fence. Some say car it when you are in your 60s because cheaper then. Others say don’t get it at all because premiums are high and risk of insures company not being there when you need it. They recommend self insure (if that is the path what value would you need to allocate to that in your portfolio?).

As far as malpractice insurance I recently raised my limits to 3.5/7 million. I just felt more comfortable than the minimum which was given (I believe it was 1 million per occurrence /3 million aggregate. Is there a number you suggest would be ideal or is it specialty specific?

On umbrella insurance policies I do want to mention a particular thing that happened with my insurance company (liberty mutual). I got a 2 million dollar umbrella initially but as my net worth grew above that I wanted to raise it to 5 million. I was denied this because I had one claim on my car insurance at the time (has some damage due to road debris (was around 4k because it was a tesla). Because of that one claim they said I have to wait a period of 3 years before I can request raise in umbrella. Knowing what I know now I would have gotten a 5 million policy initially because it really wasn’t that more expensive

Thanks for sharing that link on LTC. That was an excellent discussion. I think self-insure is the way to go. I too have read about those filial laws (one in PA) comes to mind where children are responsible for a parent’s debt. I really hope that does not become a trend. I am not responsible for how parents handle money and I can’t believe that someone thought it would be ok to put that into law.

At first blush it is startling, because son found liable to pay for a nursing home stint for Mom, despite living dad and siblings. But a careful read shows family moved mom and dad back to Greece, perhaps to avoid the bill? And Medicaid case was never adjudicated, so nursing home had no recourse.

Oh, kidding aside I went back and saw the additional discussion from the PIMD post. Sorry, I had not been back on that one. But this is another example of great customer service and responsiveness on the site.

I read thru the case.
She racked up $92K+ in charges in approximately 6 months.
The son earns $85,000/yr. He just finished paying $1100/month to pay off a tax lien(didn’t say how long he was paying that). The court reasonably thinks that one can pay off a $92K bill on a $85K income??!? A bill that is not his. He had no say in whether that bill was created assuming mom had mental capacity to direct her own care.
And what nursing home accepted a pt without Medicare/medicaid or other payment source? I cannot get anyone into a home without insurance(or other payment source) in place before they leave the hospital.
Not a chance I’m moving to PA.

I am a practicing physician have been involved in medical legal work for 25 years. I agree with your statements that physicians are rarely at risk with their personal assets from a malpractice standpoint (although I have seen it happen). There is a value, however, for physicians to have asset protection from a malpractice standpoint.

What I have seen is that plaintiff’s attorneys frequently threaten a physician’s personal assets as part of a negotiation to settle the case favorably for the plaintiff, even when the case is defensible. Defense attorneys rarely will tell a physician not to worry about a verdict in excessive of limits because of the attorneys’ potential liability for legal malpractice in the unlikely event that an excess verdict occurs.

For those physicians whose personal assets are at risk, they usually do not to take the risk of litigation and unlikely loss of their personal assets; the case is settled for the plaintiff and in an amount favorable to the plaintiff. A physician who is asset protected is more likely to have the temerity to stand up to the plaintiff’s attorney in pretrial negotiations.

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